Alibaba – What's Next

Revolutionizing China's Internet Standards

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Alibaba, the world's largest e-commerce company, has vowed to start a revolution in Internet standards, cracking down on the rampant selling of fake products, so that Chinese consumers can shop online with peace of mind.

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Revolutionizing China's Internet Standards

On Oct. 9, 2009, the Alibaba Group's auction website Taobao.com registered nearly 800 million visits in 24 hours, posting a record daily turnover of 626 million yuan. That means every minute an average of NT$2.06 million in goods changed hands on Taobao.com.

But when Alibaba Group CEO Jack Ma saw these record-breaking figures on his computer screen, his joy was overshadowed by his concern over the online trading of counterfeit goods.

China does not have a complete set of laws and regulations governing online transactions. The biggest bottleneck that the Alibaba Group faces in developing its various online ventures and services is rampant Internet scams and sales of knockoffs.

Last year China's online retail market topped 230 billion yuan with Taobao accounting for the lion's share – 200 billion yuan. This year the online shopping website is expected to double its turnover to 400 billion yuan. "Knockoffs are being traded on Taobao, and Taobao suffers the greatest damage from such goods," Ma frankly admits. When consumers are sent fake goods, they will directly turn to Taobao with their complaints.

Establishing a New Business Culture

Ma's next step is to join hands with online vendors to establish a new business culture that covers online vendors, their goods, and standards for online selling. In November last year Alibaba began to crack down on counterfeit goods, investing more than 100 million yuan in the effort.

Ten years ago Ma was the first in China to create the concept of an online store, when he founded Alibaba.com, which quickly developed into the world's largest business-to-business marketplace. Now that Alibaba has marked its tenth birthday, Ma is vocally championing the establishment of "online standards."

"The core spirit of online standards is enabling people to use the Internet safely and happily by establishing rules for online transactions and online trust," explains Daniel Zhang, chief financial officer at Taobao.

The widespread sale of pirated goods over the Internet directly undermines Chinese consumers' trust in online shopping. "For Taobao to crack down on product piracy all by itself is a really hard thing to do," warns Jimmy Yiu, CEO of Taiwanese e-commerce solution provider eDynamics, which runs one of Taobao's Taiwanese websites, tao1shop.tw. Chinese shoppers buy over the Internet because they are after bargains, and they mostly favor cheap knockoffs that look like the original, Yiu explains, "We won't succeed in cracking down on product piracy unless we can educate people not to buy fake goods, and online shops not to sell them."

Alibaba is determined to crack down on piracy. This year it will cooperate with brand-name manufacturers and local governments in China to strongly push for the adoption of laws and regulations that set norms for the trustworthiness of online transactions. Brand-name manufacturers need only to provide proof of product piracy and Taobao will immediately withdraw the counterfeit goods from its website.

Indeed, beginning last year, Taobao has been waging an ongoing battle against fake goods. In the hot-selling cosmetics category alone an average of more than 100,000 counterfeit items were barred from sale each month. Within one year almost 490,000 fake Nike products were eliminated from the website.

In another effort to fight book piracy, Taobao requires vendors to log in a book's ISBN number before it can be put up for sale. But this measure has not proven effective in containing the sale of pirated publications.

Taobao has also established a consumer complaints department, which deals with disputes over counterfeit products. Taobao can use transaction records to force an online vendor to take a product off the shelves or to accept product returns. However, since Taobao does not have the enforcement powers of a government agency, the efficacy of its fight against fake products is limited.

No matter how often fakes are purged, they inevitably crop up again. Counterfeit products are traded across the spectrum, from cosmetics, sports shoes, electronics and computers to pirated books.

Online Scammers Outsmart Controls

Although Taobao uses a credit rating mechanism to track the trustworthiness of vendors, the system is not foolproof, because the more advanced the mechanism gets, the more sophisticated the scammers become in exploiting it. Tech-savvy pirate vendors still find ways to obtain a good credit rating. For instance, one thirtysomething Taiwanese named Chen living in Kunshan, in China's Jiangsu Province, once bought a digital camera from an online vendor with a stellar three-diamond credit rating. Mr. Chen nonetheless received a counterfeit camera and his repeated complaints led nowhere. Eventually he could only blame himself for his loss.

Within just eight years Taobao ballooned from a small online trader into Asia's largest online retailer, boosting its 800 million yuan annual turnover 500-fold. Seng-Cho Chou, deputy dean of the College of Management at National Taiwan University, predicts that the company's future growth will be hampered if the black sheep among the online vendors are not eliminated. "Whether Taobao can maintain healthy growth depends on whether Ma can successfully establish online standards," Chou concludes.